What Is An Offer In Compromise (OIC)?
An offer in compromise (offer) is an agreement between you (the taxpayer) and the IRS that settles a tax debt for less than the full amount owed. This applies to all taxes, including any interest, penalties, or additional amounts arising under the Internal Revenue Code.
An offer in compromise allows you to settle your tax debt for less than the full amount you owe. It provides eligible taxpayers with a path toward paying off their tax debt and getting a “fresh start.” The ultimate goal is a compromise that suits the best interest of both the taxpayer and the IRS. To be considered, generally you must make an appropriate offer based on what the IRS considers your true ability to pay. It may be a legitimate option if you can’t pay your full tax liability, or doing so creates a financial hardship.
A common myth or perception thanks to advertisements is the impression that taxpayers can easily settle their tax liability “for pennies on the dollar” through the offer in compromise program. While you can certainly obtain a lower settlement of your tax debt, these ads provide an incorrect perception that most offers are appropriate and that most offers will be accepted (even inappropriate offers).
The IRS considers your unique set of facts and circumstances. So it is important that you have representation from an experienced tax professional, such as Tax Samaritan, so that your interests are protected and that an appropriate offer is made based on your:
- Ability to pay;
- Expenses; and
- Asset equity.
The OIC application requires you to describe your financial situation in detail, so before you proceed you must be willing to make a full and complete disclosure in the above areas.
Eligibility For An Offer In Compromise
Before the IRS will consider your offer, you must: (1) file all tax returns you are legally required to file, (2) make all required estimated tax payments for the current year, and (3) make all required federal tax deposits for the current quarter if you are a business owner with employees. In addition, you are not eligible if you are in an open bankruptcy proceeding.
The OIC program is an option for taxpayers who are unable to pay their tax amounts in a lump sum or through an installment agreement and have exhausted their search for other payment arrangements. To qualify for the OIC program, taxpayers must be able to demonstrate and prove that their tax amount can not be settled under either a lump sum or installment agreement for starters.
All other payment options must be considered before submitting an offer in compromise. The Offer in Compromise program is not for everyone.
The IRS may legally compromise a tax liability for one of the following reasons:
- Doubt As To Liability: There is doubt as to whether or not the assessed tax is correct.
- Doubt As To Collectability: There is doubt that you could ever pay the full amount of the tax owed. In these cases, the total amount you owe must be greater than the sum of your assets and future income.
- Promote Effective Tax Administration: There is no doubt that the assessed tax is correct and no doubt that the amount owed could be collected, but you have an economic hardship or other special circumstances which may allow the IRS to accept less than the balance due.
- Lump Sum Cash: Must be paid within 5 or fewer installments within 5 or fewer months from notice of acceptance.
- Short Term Periodic Payment: Must be paid within 24 months (2 years) from the date the IRS receives the OIC.
Generally, the IRS will not accept an offer if you can pay your tax debt in full through an installment agreement or a lump sum.
It is important to note that penalties and interest will continue to accrue during the offer evaluation process.
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